High cost of homeownership

Eric John Abrahamson

As the five-year anniversary of the Lehman Bros. bankruptcy and the collapse of the mortgage market approaches, Americans are still struggling to cope with the consequences of the Great Recession. More than 4 million households have lost their homes to foreclosure. Millions of breadwinners are still out of work. Meanwhile, households have seen an estimated $2 trillion in wealth evaporate.

Pundits and politicians have spent nearly five years pointing fingers, but too few have questioned the root cause of the crisis: a deeply held belief that Americans should own their own homes and that the government should help make that dream possible.

Founding Fathers like Thomas Jefferson and Benjamin Franklin believed that for the American experiment with democratic government to work, citizens needed to be independent property owners. (Indeed, in the early days of the republic, only property owners could vote.) In Jefferson's mind, small, independent farmers made ideal citizens because they couldn't be pressured to vote one way or another by a landlord or employer. Abraham Lincoln furthered the American dream when he signed the Homestead Act in 1862, giving many Americans access to land in the West.

As people left the countryside at the end of the 19th century to work in the nation's burgeoning cities, the homeowner took the place of the yeoman farmer in the epic story of American democracy. With the crisis of the Great Depression, the federal government, encouraged by the real estate and mortgage industries, became deeply involved in promoting homeownership. New agencies like the Federal Housing Administration, the Federal Home Loan Bank, and the Federal National Mortgage Association (Fannie Mae) stabilized the mortgage industry, increased liquidity, and made the 30-year, self-amortizing loan ubiquitous. After World War II, with the GI Bill, the government helped even more Americans, especially younger families, become homeowners with low-interest, high loan-to-value loans.

All of these interventions changed the basic structure of the mortgage industry, and homeownership rates in the United States increased nearly 50 percent between 1940 and 1960.

Over the next four decades, Republicans and Democrats in Congress and the White House, encouraged by the housing industry and social-welfare advocates, pushed to extend homeownership to even more Americans, especially those who had been marginalized by income or race. Government-sponsored enterprises like Fannie Mae and Freddie Mac provided a secondary market for lenders who wanted to turn a quick profit by selling their loans and using the cash to make new loans. Leveraging the market power of Fannie and Freddie, the government created subsidies for subprime borrowers. With all of these programs, homeownership peaked at 69 percent of all American households in 2004.

Politicians and officials in the real estate and mortgage industries have long touted the social benefits of homeownership, including stable communities, engaged citizens and lower crime rates, along with increased savings and household wealth. There is an implicit economic argument that these public benefits outweigh the costs of government support for tax deductions, mortgage insurance and various subsidies for homebuyers.

Dozens of academic studies give credence to the idea that some of these public benefits are real. Compared to renters, homeowners are more likely to vote and to be engaged with their community. In lower-income neighborhoods, higher rates of homeownership correlate with lower incidences of crime. A 2010 study by the Federal Reserve Bank in Kansas City also found that over the last four decades, investing in homeownership was generally a better strategy for building wealth than renting and investing in the stock market.

But in the wake of the 2008 mortgage crisis, policymakers should be asking whether the marginal increase in homeownership driven by government programs outweighs the costs to the taxpayer. And taxpayers should be asking if the public investment in homeownership is effectively focused on the right part of the market.

The mortgage interest deduction alone is estimated to cost more than $100 billion in lost tax revenues — far more, for example, than the nearly $69 billion the federal government spends on education. Far from encouraging low- or moderate-income renters to become homeowners, the deduction primarily benefits wealthier taxpayers with bigger mortgages who itemize deductions on their tax returns. And ironically, studies show that it does almost nothing to promote homeownership.

Some analysts have suggested that a simple tax credit available to low- and moderate-income families would provide a far more effective and less costly way for the federal government to use tax policy to help American families become homeowners. Eliminating the mortgage interest deduction would also reduce the incentive for households to use their home equity as a piggy bank to finance personal consumption.

As we approach the five-year anniversary of the mortgage crisis, policymakers would do well to remember the ambitions of Thomas Jefferson, Benjamin Franklin and Abraham Lincoln, who hoped to strengthen democracy by helping to ensure that many Americans could own property. But we should also ask if government support for homeownership is still critical to the health of the mortgage market and the strength of American democracy. And we should ask if the government's current programs, including the mortgage interest deduction, effectively promote this public policy goal.

Eric John Abrahamson is the author of "Building Home: Howard F. Ahmanson and the Politics of the American Dream." He is also a fellow with the Institute for Applied Economics, Global Health and Study of Business Enterprise at the Johns Hopkins University. For more information, visit http://www.buildinghome.com.